Power struggle threatens to paralyze IMF

WASHINGTON Thu Aug 26, 2010 1:03pm IST

A photographer takes pictures through a glass carrying the International Monetary Fund (IMF) logo during a news conference in Bucharest March 25, 2009. REUTERS/Bogdan Cristel/Files

A photographer takes pictures through a glass carrying the International Monetary Fund (IMF) logo during a news conference in Bucharest March 25, 2009.

Credit: Reuters/Bogdan Cristel/Files

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WASHINGTON (Reuters) - A power struggle threatens to throw the International Monetary Fund into disarray unless a compromise is reached soon between the United States and Europe over how to give more say to emerging powers.

The United States wants Europe to give some of the seats it occupies on the 24-member board of the global lender to emerging market countries to reflect their growing global economic weight.

Europe has balked at the idea of yielding some of the nine chairs it holds because it is divided over how to do it.

The sides face an Oct. 31 deadline when the mandate of the existing board expires.

"The IMF will be in crisis unless a solution is found in time," a senior board official said.

Frustrated with Europe's resistance to yield power, Washington took an unprecedented step on Aug. 6 by blocking a resolution which would have kept Europe's board dominance.

The U.S. move also reflects broader economic tensions with Europe over new global liquidity rules for banks and Europe's emphasis on fiscal austerity while Washington has stressed the need to ensure economic recovery before belt-tightening.

There are concerns in Washington that the IMF might become irrelevant and lose its legitimacy if it fails to change with the times and become fully representative of both rich and poorer nations.

The U.S. Treasury Department has said the election of the IMF executive board was an opportunity for broader governance changes in the Fund and has left the ball in Europe's court.

A senior European Union official said representatives of the 27 EU finance ministers will discuss the issue on Tuesday.

"Inevitably, the discussion will be about giving more room for emerging economies, but the question is how much," the official, who has knowledge of the talks, told Reuters.

The EU official was unsure whether EU finance ministers would discuss the impasse when they next meet on Sept. 6-7.

Some diplomats say the U.S. maneuver was a surprise because the United States, the IMF's largest and most influential shareholder, has never flexed its muscle in such an overt way at the Fund. Others acknowledged that Washington had long raised its concerns at meetings.

The dominance of the United States and Europe on the board reflects the post-World War Two economic order that is being challenged by the rise of countries like China.

The board is one of the global lender's top decision-making bodies and has overseen the approval of billions of dollars in emergency loans for countries hit by the global financial crisis including Greece, Latvia, Romania and Ukraine.

Its approval is required for regular IMF reviews and the disbursement of funds to the borrowers.

Board officials warned that unless the sides reach a compromise before Oct. 31, four seats held by India, Brazil, Argentina and Rwanda would be scrapped because they have the least quota shares.

"It will be disorderly and everyone will rush to make deals with each other," one board official emphasized.

If Europe gives ground, small EU nations, such as Belgium, the Netherlands and Scandinavian states, could lose seats.

COMPROMISES NEEDED

Ted Truman, a former assistant secretary at the U.S. Treasury, said he doubted whether Europe and the United States would allow the situation to deteriorate.

"I am sure it will be sorted out. No one wants to be responsible for paralyzing the Fund," said Truman, a senior fellow at the Peterson Institute in Washington.

He said a compromise could include two options: a commitment by Europeans to reduce over time their number of seats, or to immediately give up two of them.

"The second option could be a down-payment," he said, noting that the size of the board also made it inefficient and costly to run.

Separate negotiations are underway among IMF member countries on how to increase the voting power of rising economic powers through membership quotas.

The Group of 20 major developed and developing economies has called for an agreement by the next meeting in November on how to give emerging economies more voting power in the IMF through their quota shares. China is set to gain the most power although other emerging economies are also likely to benefit.

"India's consistent stand has been that global bodies like the IMF need reform on an urgent basis to reflect the emerging world order," a senior Indian finance official said.

(Additional reporting by Marcin Grajewski in Brussels and Abhijit Neogy and Suvashree Choudhury in New Delhi; Editing by Eric Walsh)

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